The Tug-of-War Persists



The Tug-of-War Persists
SunTrust Investment Advisory Group
Investment Outlook
The Tug-of-War Persists
We expect the battle between positive and negative forces to persist in 2016.
The Tug-of-War Persists
Our investment outlook begins with an assessment of long-run trends.
We also consider the near-term forces that create tactical investment
opportunities. In 2016, we expect the battle between positive and
negative forces to persist. Tug-of-wars eventually come to an end,
though, and an inflection point is nearing.
SunTrust Investment Outlook—2016 Edition
Outlook Highlights DECEMBER 2015 Jennifer Capouya, CFA, CFP®, CTFA, AIF Deputy Chief Investment Officer Director of Portfolio & Market Strategy  Demographic forces and the recalibra on of the global economy are
expected to be long‐term headwinds to global growth. We expect mid‐
6% equity and mid‐2% bond returns annualized over the next 10 years.
 The US recovery has been subpar, but what we have lost in strength,
Keith Lerner, CFA, CMT Chief Market Strategist Head of Tactical Asset Allocation we have gained in length. We expect US growth near 2% in 2016.
 China’s slowdown is likely to persist but we do not an cipate a hard
economic landing. Michael Skordeles, AIF Senior Market Strategist Global Macroeconomic Analysis  In 2016, we es mate a US equity return of 68% including dividends.
The majority of gains in this bull market are likely behind us.  Interest rate policy will transi on in the US in 2016, while efforts to
Aryam Vázquez Senior Global Macro Strategist Global Macroeconomic Analysis expand liquidity in Europe and Japan will con nue.
 We expect the Federal Funds rate to move gradually higher and the 10‐
year Treasury yield to top out around 3% this cycle.
 We are not recommending an overly aggressive or defensive por olio
risk posture. However, the rela ve value case favors stocks over bonds.  We are more bullish on the US and are de‐emphasizing emerging
markets, while maintaining globally diversified equity exposure.  Upside global growth and a peak in the value of the US dollar would
change our views on interna onal markets.  Within bonds, we recommend taking less risk and prefer higher‐quality,
less credit‐sensi ve securi es. Introduction
Introduction 22 Starting Points Matter
Starting Points Matter Lower for Longer
Lower for Longer 34 34
Tug-of-War Persists
Tug‐of‐War Persists US Shines Bright
The US Shines Bright 56 56
Portfolio Implications
Portfolio Implications 77 810 810
11 Asset Allocation Highlights
Asset Allocation Highlights 12
12 Expected Returns
Capital Market Assumptions 13
13 Important Disclosures Past performance is not indicative of future results. Please see Important Disclosures for additional information.
1415 Page 1
SunTrust Investment Outlook—2016 Edition
INTRODUCTION There is nothing particularly magical about the start of a new calendar year, but it is a time to reassess the global economy and markets in search of opportunities for your portfolio. As always, our outlook is presented with the caveat that our views will evolve as new information presents itself. Investing is inherently a forward‐looking process and our recommendations are predicated on what we see unfolding. As we consider both the long-term structural forces and the near-term influences that will shape investment opportunities
in the years ahead, we are focused on four main themes:
 Lower for Longer. We foresee a global economy undergoing important long-term structural changes that will keep
growth lower than recent decades. Population trends and global macroeconomic recalibrations will keep stock and bond
returns, interest rates and inflation lower but positive over the next ten years.
 The US Shines Bright. In a world characterized by a secular growth slowdown, the US is in a strong position. The US
economy is more insulated from the world's ups and downs, the business climate is solid, the labor supply is growing,
households have de-levered, and lower oil prices will be a positive for consumers and most businesses.
 Starting Points Matter. Equity valuations resulting from the extended bull market in US stocks should limit gains in the
years ahead, though the onset of a new bear is not in our sights. Similarly, multi-decade low and slowly rising interest
rates as well as a strong dollar will constrain fixed income.
 Tug-of-War Persists. Lastly, the tug-of-war that characterized 2015 should continue in 2016. We have a longer-than-
average business cycle, a slightly expensive stock market, Fed policy in transition and intensifying emerging market
challenges. On the other hand, we do not foresee a US recession, inflation and oil prices are expected to remain low,
central banks are flooding the globe with liquidity and Europe has emerged from recession.
Long-term structural forces
Sustainable leadership
Current valuations
Immediate implications
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
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SunTrust Investment Outlook—2016 Edition
LOWER FOR LONGER This year we begin our outlook by addressing the structural
trends that will shape the multi-year investment landscape as
well as a question we received regularly in 2015why are
Change in Working Age Population 2015 to 2025
interest rates still so low; will they ever go up?
Indeed, interest rates around the globe are extraordinarily low,
and, as you may have guessed from the title of our first theme,
are expected to stay that way in an absolute sense for a while.
Interest rates are also a building block of the returns for many
investments. The same elements that affect interest rates will
impact investment returns in general.
Interest rates are influenced by a wide range of factorsthe
supply and demand for credit, inflation, monetary policy and
the strength of a nation’s currencyall of which are, first and
Data source: United States Census Bureau International Data Base
foremost, a function of economic growth. As we consider the
long-term outlook for the global economy, first we examine the
In addition to a predicted decline in workforces, longevity is
influence of population change on growth. And, in the wake of
increasing and the baby boomers are retiring. An aging
the growth super-cycle of the past several decades, we’re
population also typically spends less, resulting in less demand.
focused on the structural transformation that is unfolding across
The demographic burden will also strain government finances as
the global economy.
more resources will be needed to meet a growing dependency.
Over the near term, transitory factors can have an outsized
influence on the state of the economy, while over the long
term, demographics, one of the most forecastable and reliable
variables, has considerable explanatory power. An aging
population is one of the most powerful trends confronting the
Fundamentally, economic growth is a function of the number of
people working and how productive they are. Over the next few
decades, much of the developed world and portions of the
emerging markets will see their elderly populations grow at
unprecedented rates and the growth of their workforces slow.
Certainly, demographics is expected to be a drag over the next
50 years, but over the last 50 years the global growth equation
looked much different. Workforces grew, the world economy
expanded rapidly, nations became wealthier, masses of people
were lifted out of poverty and debt levels rose.
These trends are best observed in Asia. Asian, and in particular
Chinese, growth has been pushing up global growth for decades.
But as China shifts to a more service-based economic model, its
growth, and by extension global growth, will taper. China’s
economy has long been industrial-based and manufacturingskewed, fueled by a competitively priced labor supply. Labor
While the globe as a whole will undergo demographic changes in
costs have, however, increased and its economy must evolve.
the years ahead, not all regions are equal. The pace of aging is
After decades of increasing infrastructure, property and
faster in developed regions. China is facing a similar fate as
production capacity investments, the shift toward a service-
many developed countries in the wake of its one-child policy,
oriented growth model presents Chinese policymakers with the
but the emerging markets (EM) in aggregate are in a better
challenge of delicately balancing industrial and real estate
position (Figure 1).
excesses, full-employment and a commitment to reforms.
As China shifts to a more service‐based economic model, its growth, and by extension global growth, will taper. Past performance is not indicative of future results. Please see Important Disclosures for additional information.
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SunTrust Investment Outlook—2016 Edition
China is not alone in this economic recalibration. The trend
The recalibration of the global economy will remain a key
toward a service-oriented global economy has resulted in a
theme for investors. A slowdown in growth is not, however, a
decline in trade and sluggish manufacturing trends worldwide.
call for an impending global recession. We’re still of the view
This is most evident in the waning demand for raw materials. It
that a global recession over the near term is unlikely and the
is also driving down investment activity across the world as a
world policy backdrop will remain supportive. Our base case
services-based economy requires less capital than an industrial-
outlook includes the continuation of monetary accommodation
driven model. Along with demographics, these trends help to
and the pursuit of structural reforms. Central banks across the
explain diminished productivity gains, slower income growth, a
worldprimarily the European Central Bank and the Bank of
lack of inflation and the sharp correction in commodity prices.
Japanare still committed to supportive measures, while a
It also provides context for the maintenance of global monetary
cautious and gradual monetary tightening cycle is expected
accommodation. While the Fed will begin the process of raising
from the Fed. A keener focus on technology-driven productivity
short-term rates, the overall level of interest rates globally will
enhancements, social adjustments, such as immigration and
likely remain low.
labor policy changes as well as liberalized capital market
Rising global debt levels are also an important component
regimes all have the potential to brighten our outlook.
underlying the global economic recalibration story. A long
period of higher borrowing by both the public sector and
particular. A slowing China and the modest removal of the post
-financial crisis monetary policy in the US will put further stress
The recalibration of the global economy will remain a key theme for investors. on EM debt service costs, while exacerbating currency risks.
Simply put, in the absence of a productivity surge or major
structural changes, we expect demographic forces and a
recalibration of the global economy to provide a headwind to
growth, commodity prices, inflation and by extension, interest
rates and investment returns for years to come. Global growth
will likely trend below recent decades (Figure 2).
A Lower for Longer world also does not mean stocks and bonds
become bad investments, but it may require more savings to
reach goals. For stocks, returns are a function of earnings
growth and the price investors are willing to pay for that
growth. Even with lower economic growth, we expect steady
earnings trends. Moreover, a lower inflation environment has
historically been beneficial for stocks as investors are willing to
pay more for growth as future earnings and asset values are
‘discounted’ by a lower factor. We expect positive but lower
Annualized Growth in World GDP (%)
equity returns.
For bonds, we do not expect demonstrably higher yields any
time soon. Official interest ratesthose controlled by central
banksshould rise gradually. Long-term interest rateswhich
are correlated with future rates of growth and inflationshould
also remain tame. Bonds will continue to provide stable income
and ballast during periods of market stress, but bond investors
Data source: McKinsey Global Institute. GDP=Gross Domestic Product
should expect lower returns going forward.
The silver lining for investors comes in the form of lower longterm inflation. That’s because many of us invest in order to
grow or sustain wealth and protect purchasing power in the
future. So while investment returns should be lower, inflation’s
bite will be felt less.
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
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SunTrust Investment Outlook—2016 Edition
THE US SHINES BRIGHT In a world characterized by a secular slowdown in growth,
the US is in a strong position. Over the long term, favorable
demographics and advanced economic institutions will help
World Bank's Ease of Doing Business Rankings
Hong Kong
Mexic o
So. Afric a
outlook for the US. They also support higher stock market
multiples compared to international markets. More recently,
growth has been subpar, but there are reasons for optimism.
propel growth. Moreover, the energy renaissance will have a
positive impact. These factors support our favorable relative
Unlike Germany and Japan, which are confronted with
shrinking populations and labor forces, the US will likely fare
Franc e
much better. While the baby boomers are aging, the median
age in the US is 37, which is low relative to 46 in Japan and the
Data source: World Bank. Rank out of 189 countries.
mid-40s for most of Europe. The US fertility rate, which is an
important indicator of future population levels, is near the
Also supportive of US growth, the energy renaissance and trend
replacement rate, and is expected to remain there, aided by
toward energy independence is expected to endure and have a
the availability of educational and employment opportunities.
positive impact on many industries. Of course, depressed crude
Another attractive aspect of US demographics is immigration.
oil prices have dampened the profitability of the energy sector
With a fertility rate near the replacement level, the US is not
and have the potential to weigh on oil production in the near
dependent upon immigration for population growth, but it’s a
term. However, claims that the production boom will come to
positive, nonetheless. The US may indeed be one of the few
an end fail to fully recognize the cost-saving impact of
developed countries to experience population and labor force
technological advancements and the lower break-even prices
growth in the decades ahead.
for many US producers. As a result, the US has emerged as a
global leader in the production of oil and natural gas. The
energy renaissance is a boon for the manufacturing, travel,
transportation, retail and auto industries. Lower energy prices
Favorable demographics, advanced economic institutions and the energy renaissance support our favorable relative outlook for the US. also improve living standards and national security.
Over the long term, economic prospects for the US are
encouraging relative to its peers, but what of the lackluster
growth environment of the last few years? No question the
current recovery has been subpar relative to history. But in the
context of a slower growth world, and when considering the
The quality of US economic institutionssecure property rights,
$18 trillion size of the world’s largest economy and the law of
a better business environment and the rule of law—also creates
large numbers, the 2% average growth pace of the recovery
superior incentives for capital investment and innovation in the
becomes more respectable. Second, growth in the US remains
country. Specifically the laws and processesfrom acquiring
above developed world averages. Lastly, what we have given
credit to obtaining building permitsthat determine how easily
up in strength, we are gaining in length as the economic cycle
a business can be started and operated are important building
has elongated. The current expansion has reached 78 months
blocks of economic development. As can be seen in the World
versus the average of 58 for the 11 cycles since 1945 (Figure 4).
Bank’s Ease of Doing Business Index rankings (Figure 3), the US
And in the absence of apparent precursors, we believe the
once again shines bright.
current cycle will extend through 2016.
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SunTrust Investment Outlook—2016 Edition
Length of Economic Expansions (Months)
Also supportive of our elongated cycle view is housing
activity—while improved compared to the recessionary period,
it remains well below long-term averages. The housing market
is undergoing a lengthy adjustment that will likely take several
more years as those most greatly impacted by the recession
repair their personal balance sheets and credit scores. While
prices are climbing in certain areas, housing generally remains
accessible and affordable for most of the US.
Lastly, government spending, which has been a drag on growth,
Data source: National Bureau of Economic Research
Key to our longer economic cycle thesis is an absence of the
traditional harbingers of recessionhigh inflation and interest
has stabilized due to improved tax revenue. We expect
government spending, supported by the first increase in
defense expenditures in five years, to be additive to growth.
Within the context of a favorable long-term US outlook, in 2016
we expect consumer and business spending and less drag from
reduced government purchases to be partially offset by the
rateson the horizon. In practical terms, these manifestations
headwinds of a stronger US dollar and tepid global growth. In
typically take the form of a sustained spike in crude oil prices
sum, we expect that US economic growth will remain near 2%,
or tight monetary policy, which would reduce borrowing and
similar to the average growth rate of the recovery. However,
investment. Both are predictably restrained in the near term.
our outlook is not without risk.
Trends that are also consistent with expectations for a longer
cycle are: a cautious but healthy consumer, a modest outlook
for corporate spending, a housing market that is gradually
healing and government spending that is set to turn around.
The consumer is the bedrock of the economy and we expect
The lower overall level of growth is in itself a risk as the US
economy is more susceptible to shocks. Given that credit is the
lifeblood of the economy, we are also concerned that the best
days of the credit cycle are behind us and we expect a modest
pickup in corporate default rates.
modest consumption growth in 2016. Consumer spending
remains guarded as memories of the financial crisis linger. This
has been reflected in increased savings and more cautious
borrowing. The consumer is on solid ground, though, given
Credit is the lifeblood of the economy. employment gains and tentatively improving wages.
In addition, given the level of stimulus already in the system,
monetary policy may be less effective during the next
The consumer is the bedrock of the economy. downturn. Inflation is also a risk. The factors that have
contributed to tame inflation readingsChina’s slowdown and
We also forecast moderate capital investment. The corporate
sector remains flush with record levels of cash. But reflective
of weary executives concerned about global growth prospects,
regulation and the political climate, the business sector has
reduced investment in big-ticket items in favor of stock
buybacks and dividends. Moreover, a lower oil price induced
strain on the energy sector is likely to persist in 2016. On the
other hand, a Fed rate increase may actually goose capital
investment as firms scramble to lock in low-rate financing.
depressed commodity pricesshould dissipate. For instance,
crude oil prices have declined more than 60% since June 2014.
Thus, another decline of this magnitude is unlikely. Conversely,
housing-related costs have steadily risen over the past few
years and are likely to continue climbing in 2016. Moreover,
wage pressures are slowly beginning to build given the 5%
unemployment rate and sagging productivity. Another risk
manufacturing, which was a bright spot early in the recovery,
has cooled due to a heavier reliance on foreign demand and the
stronger US dollar.
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SunTrust Investment Outlook—2016 Edition
STARTING POINTS MATTER To derive our outlook for investment returns over the next
Notably, similar valuation measures using one-year statistics
decade, we combine our expectations regarding longer-term
are less meaningful (Figure 5 right). And there is a prevalence
structural factors with an analysis of the current cycle.
of negative one-year returns while over the long term,
Secular global economic forces, such as those discussed in our
compound annual returns are almost always positive. Over
prior two themesLower for Longer and the US Shines Bright
short periods, temporary factors can greatly influence investor
are critical. Long-run corporate earnings growth is closely
sentiment resulting in a departure from fundamentals. Perhaps
related to economic growth. Bond returns are dependent on
best said by Benjamin Graham, “in the short run, the market is
the trend in interest rates, which once again is driven by the
a voting machine, but in the long run it is a weighing machine.”
level of economic activity. On these measures, we conclude
An understanding of the relationship between valuation and
that investors should brace for lower-than-historical stock and
returns also helps to underscore the danger of market timing
bond market returns over the long term, while the US is
when trying to achieve long-term financial goals.
expected to lead with attractive relative results and lower risk.
Bond returns possess an even greater relationship to starting
In addition to these views, we must also incorporate an
points, or current yields. Intuitively, bond returns are
assessment of current market conditions to arrive at fair
dependent on two variables: the current yield available to
estimates for returns. This is where starting points—or what
investors and the rate at which income will be reinvested
investors currently pay for investments—i.e., valuations, come
throughout the bond’s term (barring credit-related factors).
into play. Starting points take the form of current price-to-
Just as stock market valuations are readily observable, so too
earnings ratios for stocks, interest rates (or yields) for bonds
are current bond yields. Today’s starting yield for intermediate
and exchange rates for currencies. At different points in a
-term core taxable bonds is 2.4%. We further expect the
cycle, stock, bond and currency market valuations can vary
federal funds rate to move gradually higher and the 10-year
quite a bit. And due to mean-reverting characteristics, they
Treasury yield to top out around 3% this cycle given our Lower
can tell us a lot about where markets are headed over time.
for Longer thesis. Our expectation is for bond returns of
Let’s first consider equity market valuations. In the wake of a
approximately 2.5% over the next ten years.
historically strong bull market, the US stock market’s price-to-
Lastly, for non-US investments we consider how currencies
10-year earnings ratio stands at approximately 26 times. This
will impact returns. We combine our secular outlook with
level has historically been associated with a return in the mid-
current starting points—exchange rates. While many currencies
6% range (Figure 5 left)—consistent with our expectation of a
have depreciated relative to the US dollar, most are currently
6.75% annualized return over the next ten years. We expect
not at a level consistent with fair value or competitiveness.
lower, but still respectable returns from the US equity market.
Thus, we do not expect currency gains over the next ten years.
Price/10 Year Earnings
One year price-toearnings ratios are
less meaningful
Price/Next 12 Mo Earnings
A price-to-10 year earnings
ratio of 26 times has been
associated with a mid-6%
annualized return.
Next 10 Year Compound Annualized Return
Next 12 Month Price Return
Data source: Factset, Cornerstone. 12 Mo Chart: 1954–2014. 10 Yr Chart: 1947-2014. Stock market represented by the S&P 500.
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SunTrust Investment Outlook—2016 Edition
TUG‐OF‐WAR PERSISTS Looking closer at the near term, we expect the battle
between positive and negative forces that characterized
accompanying bear markets, remain low. Global economic
2015 to persist. Over the past year, the bulls and bears both
policy remains accommodative—the money supply is growing at
struggled to gain the upper hand, but neither secured the
about twice the rate of the global economy. Nonetheless, the
momentum to drag the opposition over the center line. The
world economy is still struggling to gain traction, and we
battle lines are drawn and the opponents look equally strong.
anticipate that global growth will be stuck in a 2.5—3.0% range
On one side, the bull market is long in the tooth, asset values
throughout the next couple of years with low inflation. This
are elevated, the Fed is set to gradually raise rates and credit
outlook is shaped by our view of material developments taking
and emerging market risks abound. On the other side of the
place across key regions of the global economy, such as China,
rope, global recession risks remain low, stocks have relative
that will likely keep worldwide growth tepid.
value given half the world’s government bond yields are less
than 1%, stimulus provides a tailwind, the European growth
outlook is more stable, while a hard economic landing in China
In a continuation of the US Shines Bright thesis, the US also
does not look to be in the cards. Tug-of-wars eventually come
looks favorable relative to other regions at present. US
to an end, though, and an inflection point is near.
economic trends are better than in most areas of the globe and
our SunTrust Leading Indicator Composite shows only a 15% risk
of recession over the next year. Not only are economic trends
Stocks appear to be in the later stages of the bull cycle and are
sturdier, but we prefer the defensive characteristics of the US
encountering headwinds in the form of an uncertain macro
market too—it tends to hold up better than other regions during
environment, elevated valuations, weak earnings momentum,
periods of turmoil, as was the case during the August selloff.
narrowing participation and cracks in the credit markets. Yet,
That said, it’s hard to project big gains from current levels,
the primary factors that tend to accompany a market peak,
save for significant multiple expansion. Thus, our base case
such as recession, tight monetary policy, oil spikes, and
outlook for the S&P 500 in 2016 is for a 6%8% return including
investor euphoria are largely absent. Moreover, bull markets
dividends, driven primarily by earnings growth.
tend to end with a bang, something we have yet to see.
Outlook: Battle between positive and negative forces persists
As we enter 2016 we see low recession and bear market risks, the US poised to outperform but an inflection point nearing.
The opponents look equally strong, however, and tug-of-wars eventually come to an end. Until then, the investment outlook
is one of relative opportunity and walking the tight line of balancing return opportunities and risks.
Base Case
• Global growth decelerates
• Credit markets deteriorate
• Strong dollar weighs on profits
• No recession; 2.53.0% global growth
• 68% US total return, 5% earnings growth
• Strong global monetary accommodation • China stabilizes or does “whatever it takes”
• Global growth surprise • 25% gains after flat markets
• Haven’t seen last push
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
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SunTrust Investment Outlook—2016 Edition
Importantly, we expect relief in 2016 from three factors that
Finally, in China, where the unanticipated yuan devaluation in
served as headwinds in 2015—corporate earnings, the
August served as a catalyst for the global market selloff, we
Federal Reserve and China. First, it is not a coincidence that
expect either the economy to stabilize or for the country’s
US stocks have moved sideways amid earnings growth that was
authorities to have their “whatever it takes” moment, much
virtually unchanged over the past year (Figure 6). The lagged
like the US did post-Lehman in 2009, followed by the Eurozone
impact of a 59% collapse in energy sector earnings and the
in 2012. Signs of stabilization are already underway as China’s
headwinds to multinationals from a historic run in the US dollar
government spending has ramped up.
led to flat overall earnings growth in 2015. Given the US dollar
is trading below its March high and easier year-over-year
earnings comparisons for the energy sector, the profit outlook
Investing is about probabilities, not certainties, which is why
for 2016 should improve. We expect earnings growth of about
we position portfolios according to our base case. Nonetheless,
5% (to an annual level of $125 for the S&P 500) based on
we must contemplate the scenarios that would lead to a shift in
modest economic growth, flat margins and stock buybacks. This
positioning, especially now, as we believe the market is nearing
should be the main driver of market gains in 2016 as we expect
an inflection point. On the bullish side we consider an upside
price-to-earnings multiples to remain around the recent range
surprise in global growth, trends following flat-return years and
of 17.5—18.0, consistent with low inflation regimes.
end-of-cycle-observations. The bearish scenario considers the
opposite—global growth stalls out and recession risks build.
surprise in global growth. The global money supply has surged
Earnings Growth
in the wake of nearly 70 central bank stimulus actions in 2015—
monetary stimulus works with a lag. There are also signs that
The most bullish case in our view would be an upside
global manufacturing data is toughening. If global growth
5% 1%
exceeds expectations, stocks would likely have a robust year,
the US dollar would weaken and we would anticipate a regime
shift in leadership. Beaten up areas such as emerging markets,
commodities and energy would be expected to outperform.
S&P 500 Earnings
Energy Sector Earnings
It is also worth considering that flat market years—plus or
Data source: Factset, SunTrust IAG. 2015 and 2016 are estimates.
minus a 5% total return—such as 2015, tend not to be followed
by another flat year. In the eight flat years since 1945, the S&P
500 finished up 100% of the time the next year, averaging a
robust gain of 25%. Notably, 2011, the most recent flat year,
Next, we expect the Fed to be less of a headwind as investor
expectations already appear aligned with a shift in policy.
Moreover, we expect a shallow tightening cycle as inflation will
likely remain dormant. It’s also important for investors to
recognize that the first rate hike typically does not kill bull
markets. The average one-year return for the S&P 500
following the first interest rate rise from low levels (defined as
less than 4%) is 9%. Similarly, the market has averaged an 11%
yearly return when the Fed has raised rates at a gradual pace
bears similarities to 2015. In 2012, stocks finished up 16%.
Furthermore, if 2015 was the culmination of the current bull
market in stocks, it would be one of the weakest late innings
on record. Bull markets tend to end with a bang, averaging a
gain of 14% in the final six months. Moreover, an expensive
market can always become more expensive. As we showed
previously, there is virtually no relationship between valuations
and one-year market returns.
(not every meeting). We must also consider that the European
Central Bank, the Bank of Canada and the Bank of Japan, along
with most emerging market central banks, such as the People’s
Investing is about probabilities, not certainties. accommodation in 2016.
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SunTrust Investment Outlook—2016 Edition
The bearish case considers a deceleration in global growth
conditions for the second time under the Abe regime, and the
giving way to greater recession risks. In this light, the biggest
slowdown in China adds another drag. That said, the direction
red flag is the credit market which shows increased signs of
of the economy does not necessarily dictate the direction of
stress. Not only are increased energy sector defaults a concern,
the stock market. This has certainly been the case for the
but the sizeable build up in corporate debt in the emerging
Japanese stock market which offers investors attractive
markets could lead to dislocations. Indeed, the Bank for
valuations, positive earnings trends and an improved corporate
International Settlements notes that total debt ratios are now
governance climate owing to Prime Minister Abe’s reforms.
significantly higher than at the peak of the last credit cycle in
2007. Moreover, countries that have issued significant dollardenominated debt would experience a dual hit to their finances
should a transition in US monetary policy lead to a stronger
dollar and increased capital outflows. At the same time,
another strong push higher by the dollar would weigh on
corporate profits. If the probability of this scenario increases,
we would look to reduce risk in portfolios.
Emerging markets are facing a battle between a slowdown in
growth and policy measures aimed to soften the blow. The
economic recalibration in China, fall in commodity prices,
rising debt levels and strong US dollar are a potent mix.
but the region remains vulnerable to shocks. The macro outlook
across Europe has exhibited improvement from a few years ago,
supports the expansion of the European Central Bank’s balance
Relative Economic Growth and Equity Performance
GDP spread EM-DM (lhs)
sheet. However, equity market valuations, which are fair, and
above-average fund manager positions in the region suggest the
macro improvement is partially reflected in shares. Our outlook
on Europe is also balanced against the structural issues
associated with a one-size-fits-all monetary policy and political
uncertainties. As such, the business environment will remain
vulnerable and the Eurozone’s ability to respond to external
advantage, supporting our de-emphasis (Figure 7).
lower oil prices, healthier credit trends and reduced fiscal
unlikely to improve much near term. This is important
with corporate earnings and household demand benefiting from
hand-in-hand with a narrowing of its economic growth
In Europe, the economic and business climate has improved,
insomuch as relative EM equity underperformance has gone
substantial domestic imbalances of recent years, EM growth is
EM performance relative to DM (rhs)
Data source: Haver, Factset. GDP = Gross Domestic Product. DM = Developed Markets
potential growth rate is hovering around 1.2—1.4%, too low for
an economy emerging from a recession.
There are some positives, however. We are not in the China
Japan, Asia’s most-advanced economy, is enduring an internal
tug-of-war between a robust stock market and an economy that
has failed to grow sustainably and reverse years of declining
inflation. Without structural reforms targeting a shrinking labor
productivity trends, Japan’s ability to erase years of economic
stagnation and meaningfully contribute to global growth will
remain limited. Indeed, the economy is now facing recessionary
hard landing camp and a repeat of the 1997-1998 Asian
currency crisis is unlikely. Also, the bear market in EM stocks is
four years old and some valuation metrics are near financial
crisis extremes. At the same time, EM has become underowned, with global fund managers holding among the lowest
exposure of the past decade. Thus, given low investor
expectations, a little good news, such as an upside surprise in
global growth or reversal in the US dollar, could go a long way.
Emerging markets are facing a battle between a slowdown in growth and policy measures aimed to soften the blow. Past performance is not indicative of future results. Please see Important Disclosures for additional information.
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SunTrust Investment Outlook—2016 Edition
PORTFOLIO IMPLICATIONS The major themes which shape our outlook for the global
concerns about the fragility of the economic and policy
economy and markets in 2016 have significant implications
landscape. Emerging market valuations are attractive, but we
for portfolios. The low growth, low interest-rate environment
associated with our Lower for Longer thesis underscores the
macroeconomic adjustments and a depressed outlook for
need for increased savings and the de-emphasis of asset
commodities. Upside global growth and a peak in the dollar
classes, such as commodities, that benefited the most from the
would change our views on international markets.
boom of the prior decades. Over the next 10 years, due to
better business prospects and higher growth rates, we’re
bullish on the US. Nearer term, the ongoing tug-of-war, which
is approaching an inflection point, highlights the need for a
flexible and diversified approach.
On a more granular basis, within the US we have a preference
for large caps which tend to hold up better during periods of
increased volatility and are less vulnerable to a turn in the
credit cycle. Overseas, we still see an opportunity in small-cap
shares given the earlier stage of the economic cycle and
Key to recommended portfolio positioning is where we
believe we are in the business cycle. Given the mature stage
of the US business cycle but low global recession risk and the
tug-of-war environment, we are not recommending an overly
aggressive or defensive risk posture. However, the relative
value case still favors stocks over bonds given steady earnings
growth and dividends above most bond yields. Within bonds, we
recommend taking less risk and prefer higher-quality, less
credit-sensitive municipal, Treasury and mortgage-backed
securities. We also advise allocations to diversified, long/short
equity and macro hedge funds which should help to balance
equity risk and provide less correlated sources of return.
considerable monetary stimulus.
Our sector recommendations are influenced by our outlook for
the pace of the Fed transition, energy prices and interest rates.
For investors that can access tax-advantaged investments, we
see an opportunity in energy infrastructure master limited
partnerships which already reflect depressed energy prices. We
also like the defensive and cyclical attributes of the technology
and defense sectors. Technology is valued similarly to the
broad market, which is unusual given its better growth
prospects. Defense should benefit from increased government
spending. A Fed rate hike should aid financials, but ratesensitive sectors, such as utilities, will likely be pressured.
Within equity, we’re starting the year with our long-held
bias for the US. We continue to favor the US based on our
expectations for better growth prospects and lower risks. We
still recommend investors remain allocated to Europe and
The ongoing tug‐of‐war highlights the need for a flexible and diversified approach. Japan but less so than the US at this point given lingering
Growth is firm
Outlook deteriorating
Outlook improving
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
Growth is firm
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SunTrust Investment Outlook—2016 Edition
A Proven, Disciplined Process Asset allocation is the most important determinant of investment success. Our disciplined, yet flexible, process encompasses long‐
term thinking, the identification of short‐term opportunities and the incorporation of compelling investment solutions.  Our process first focuses on long‐run fundamental trends as we believe they reveal the true picture of opportunities available to investors over the long term.  We then build the optimal mix of investments based on these long‐range forecasts with a focus on global diversification.  Our current view of the markets can sometimes differ from long‐range forecasts. When that occurs, we take advantage of near‐
term opportunities to enhance potential return or manage risk.  Lastly, we translate our views into actionable ideas by allocating to compelling solutions that best align with our perspective and your goals. CATEGORY
 At different stages of the business cycle we recommend
Portfolio Risk
varied risk exposure. Currently the environment is
balanced. Return opportunities and risk offset each other
more evenly. We, therefore, recommend portfolio risk
levels be kept near neutral.
 The positives of global monetary stimulus, improving
developed market growth, corporate profitability and
limited attractive alternatives are offset by a maturing
cycle, richer valuations, geopolitical risk and the Fed.
 Stocks appear attractive on a relative basis and offer
dividend yields competitive with bond yields.
 Within equities, we prefer the US where risks are
inherently lower and the economy is more stable. We hold
a neutral view on Asia vis-à-vis Europe and are embracing
opportunities in international small-cap shares.
 We are de-emphasizing, but not abandoning, emerging
markets. China is undergoing a complex adjustment, but
the risks of a hard economic landing or currency crisis
appear low. Moreover, given low valuations, a little good
news could go a long way.
 Low interest rates remain a headwind for bonds, thus, we
Fixed Income
advise an underweight and shorter duration posture.
 High-quality bonds, however, play an important role as a
diversifier and source of income. We also recommend
modest allocations to high-yield corporates on attractive
yields, lower rate sensitivity and our economic outlook.
 We are avoiding non-US bonds due to low, unattractive
yields and the potential for currency losses, especially as
attention shifts towards the change in Fed policy.
 Non-traditional strategies, such as hedge funds, should
benefit from higher market volatility, especially with
equity and bond valuations elevated, the Fed transition
and rising geopolitical risks. Hedged equity, in particular,
should benefit from falling correlations among stocks; we
prefer managers who can quickly adjust their net
exposures as global equity dynamics evolve.
 We continue to recommend against commodities given
abundant supply, a strong US dollar, global deflationary
pressures and the slowdown in China.
Dials illustrate current recommended tactical positioning relative to investment policy statement ranges. Hedge funds often engage in leveraging and speculative investment
practices that may increase the risk of investment loss, can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors. Hedge funds may involve
complex tax structures and delays in distributing tax information. Hedge funds are not subject to the same regulatory requirements as mutual funds and often charge higher fees.
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
Page 12
SunTrust Investment Outlook—2016 Edition
Capital Market Assumptions 10‐Year Term Expected Expected
Historical provide an estimate of asset ASSET CLASS
Historical Return
class return, risk and Return
correlation over a ten‐year EQUITY
period. Global Equity
Our process is grounded in US Large‐Cap Core Equity
determining the secular US Small‐Cap Core Equity
themes that will define Master Limited Partnerships
opportunities available to Non‐US Developed Markets Equity
investors over the long term, Emerging Markets Equity
analyzing the current market Non‐US Dev. Markets Small Cap Equity
conditions that will impact US Real Estate Securities
future results and developing an outlook on the return and FIXED INCOME
risk drivers that will Intermediate‐Term Municipal Bonds
ultimately influence capital US Intermediate‐Term Core Taxable Bonds
market outcomes. US Government Bonds
US Treasury Inflation Protected Securities
US Mortgage‐Backed Securities
US Investment Grade Corporate Bonds
US High‐Yield Corporate Bonds
Non‐US Developed Markets Bonds
Emerging Markets Bonds
High‐Yield Municipal Bonds
Relative Value
Diversified Strategies
Global Macro
Hedged Equity
Managed Futures
Gold Spot
Private Equity
Private Real Estate
Expected returns reflect SunTrust’s average annual return assumptions over the next 10 years as of November 2015,
are not guaranteed and are subject to revision without notice. Estimated risk is derived from quarterly 10-year historical data. Historical return and risk statistics are as of June 2015 with long-term numbers based on the last 25 years
(depending on the availability of data). Private equity historical data is as of March 2015. Select historical risk statistics are adjusted for serial correlation for a more appropriate comparison with expected risk. Data Source: Morningstar, CSFB/Tremont Hedge Index, Hedge Fund Research, Inc., MSCI, JP Morgan, S&P/Citigroup.
Hedge funds often engage in leveraging and speculative investment practices that may increase the risk of investment loss, can be highly illiquid, and are not required
to provide periodic pricing or valuation information to investors. Hedge funds may involve complex tax structures and delays in distributing tax information. Hedge
funds are not subject to the same regulatory requirements as mutual funds and often charge higher fees.
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
Page 13
SunTrust Investment Outlook—2016 Edition
Advisory managed account programs entail risks and may not be suitable for
all investors. Please speak to your advisor to request a firm brochure which
includes program details, including risks, fees and expenses.
Services provided by the following affiliates of SunTrust Banks, Inc.: Banking
products and services are provided by SunTrust Bank, Member FDIC. Trust and
investment management services are provided by SunTrust Bank, SunTrust
Delaware Trust Company and SunTrust Banks Trust Company (Cayman)
Limited. Securities, brokerage accounts, insurance (including annuities) and
investment advisory products and services are offered by SunTrust Investment
Services, Inc., an SEC registered investment adviser and broker-dealer, member
FINRA, SIPC, and a licensed insurance agency. Investment advisory services are
offered by GenSpring Family Offices, LLC., an SEC registered investment adviser
owned by GenSpring Holdings, Inc., which is wholly-owned by SunTrust Banks, Inc.
SunTrust Bank and its affiliates and the directors, officers, employees and agents of
SunTrust Bank and its affiliates (collectively, "SunTrust") are not permitted to give
legal or tax advice. Clients of SunTrust should consult with their legal and tax
advisors prior to entering into any financial transaction.
Investment and Insurance Products:
•Are not FDIC or any other Government Agency Insured
•Are not Bank Guaranteed
•May Lose Value
The opinions and information contained herein have been obtained or derived from
sources believed to be reliable, but SunTrust Investment Services, Inc. (STIS)
makes no representation or guarantee as to their timeliness, accuracy or
completeness or for their fitness for any particular purpose. The information
contained herein does not purport to be a complete analysis of any security,
company, or industry involved. This material is not to be construed as an offer to
sell or a solicitation of an offer to buy any security.
Opinions and information expressed herein are subject to change without
notice. STIS and/or its affiliates may have issued materials that are inconsistent with
or may reach different conclusions than those represented in this commentary, and
all opinions and information are believed to be reflective of judgments and opinions
as of the date that material was originally published. STIS is under no obligation to
ensure that other materials are brought to the attention of any recipient of this
The information and material presented in this commentary are for general
information only and do not specifically address individual investment objectives,
financial situations or the particular needs of any specific person who may receive
this commentary. Investing in any security or investment strategies discussed herein
may not be suitable for you, and you may want to consult a financial
advisor. Nothing in this material constitutes individual investment, legal or tax
advise. Investments involve risk and an investor may incur either profits or losses.
Past performance should not be taken as an indication or guarantee of future
STIS shall accept no liability for any loss arising from the use of this material, nor
shall STIS treat any recipient of this material as a customer or client simply by virtue
of the receipt of this material.
The information herein is for persons residing in the United States of America only
and is not intended for any person in any other jurisdiction.
Investors may be prohibited in certain states from purchasing some over-the-counter
securities mentioned herein.
The information contained in this material is produced and copyrighted by SunTrust
Banks, Inc. and any unauthorized use, duplication, redistribution or disclosure is
prohibited by law.
STIS’s officers, employees, agents and/or affiliates may have positions in securities,
options, rights, or warrants mentioned or discussed in this material.
Asset Allocation does not assure a profit or protect against loss in declining financial
markets. Past performance is not an indication of future results.
Fixed Income Securities are subject to interest rate risk, credit risk, prepayment risk,
market risk, and reinvestment risk. Fixed Income Securities, if held to maturity, may
provide a fixed rate of return and a fixed principal value. Fixed Income Securities
prices fluctuate and when redeemed, may be worth more or less than their original
High Yield Fixed Income Investments, also known as junk bonds, are considered
speculative, involve greater risk of default and tend to be more volatile than
investment grade fixed income securities.
International investing entails greater risk, as well as greater potential rewards
compared to U.S. investing. These risks include potential economic uncertainties of
foreign countries as well as the risk of currency fluctuations. These risks are
magnified in emerging market countries, since these countries may have relatively
unstable governments and less established markets and economies.
Investing in smaller companies involves greater risks not associated with investing in
more established companies, such as business risk, significant stock price
fluctuations, and illiquidity.
Emerging Markets: Investing in the securities of such companies and countries
involves certain considerations not usually associated with investing in developed
countries, including unstable political and economic conditions, adverse geopolitical
developments, price volatility, lack of liquidity, and fluctuations in currency exchange
Hedge funds may involve a high degree of risk, often engage in leveraging and
other speculative investment practices that may increase the risk of investment loss,
can be highly illiquid, are not required to provide periodic pricing or valuation
information to investors, may involve complex tax structures and delays in
distributing important tax information, are not subject to the same regulatory
requirements as mutual funds often charge high fees which may offset any trading
profits, and in many cases the underlying investments are not transparent and are
known only to the investment manager.
Managed Futures and commodity investing involve a high degree of risk and are not
suitable for all investors. Investors could lose a substantial amount of money in a
very short period of time. The amount you may lose is potentially unlimited and can
exceed the amount you originally deposit with your broker. This is because trading
security futures is highly leveraged, with a relatively small amount of money
controlling assets having a much greater value. Investors who are uncomfortable
with this level of risk should not trade managed futures or commodities.
Real Estate Investments are subject to special risks, including interest rate and
property value fluctuations, as well as risks related to general economic conditions.
Because of their narrow focus, sector investments tend to be more volatile than
investments that diversify across many sectors and companies.
Asset classes are represented by the following indexes:
S&P 500 Index is comprised of 500 widely-held securities considered to be
representative of the stock market in general.
Cash is represented by the BofAML US Treasury Bill 3 Month index which is a
subset of The Bank of America Merrill Lynch 0-1 Year US Treasury Index including
all securities with a remaining term to final maturity less than 3 months.
US Intermediate Term Core Taxable Bonds are represented by the Barclays US
Aggregate Bond index which is the broadest measure of the taxable U.S. bond
market, including most Treasury, agency, corporate, mortgage-backed, assetbacked, and international dollar-denominated issues, and maturities of one year or
US Government Bonds are represented by the BarCap US Gov’t Intermediate index
which is an unmanaged index comprised of all publicly issued, non-convertible
domestic debt of the U.S. government or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S. government.
US TIPS are represented by the Bank of America Merrill Lynch US Treasury
Inflation Linked index which is an unmanaged index comprised of U.S. Treasury
Inflation Protected Securities with at least $1 billion in outstanding face value and a
remaining term to final maturity of greater than one year.
US Mortgage-Backed Securities are represented by the U.S. Mortgage-Backed
Securities (MBS) Index which covers agency mortgage-backed pass-through
securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie
Mae (FNMA), and Freddie Mac (FHLMC).
US Investment Grade Corporate Bonds are represented by the Barclays US
Corporate Investment Grade index which is an unmanaged index consisting of
publicly issued US Corporate and specified foreign debentures and secured notes
that are rated investment grade (Baa3/BBB- or higher) by at least two ratings
agencies, have at least one year to final maturity and have at least $250 million par
amount outstanding.
US High Yield Corporate Bonds are represented by the BofAML US HY Master
index which is an index that tracks US dollar denominated below investment grade
corporate debt publicly issued in the US domestic market.
Non-US Developed Markets Bonds are represented by the Citi WGBI NonUSD USD
index which is an index covering thirteen government-bond markets: Australia,
Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the
Netherlands, Spain, Sweden, and the United Kingdom. For inclusion in this index, a
market must total at least (U.S.) $20 billion for three consecutive months.
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
Page 14
SunTrust Investment Outlook—2016 Edition
Emerging Markets Bonds are represented by the JP Morgan GBI EM Global index
which is a comprehensive emerging market debt index that tracks local currency
bonds issued by Emerging Market governments. It includes only those countries that
are directly accessible by most of the international investor base and excludes
countries with explicit capital controls, but does not factor in regulatory/tax hurdles in
assessing eligibility.
Intermediate Term Municipal Bonds are represented by the BarCap Municipal 5 Yr 4
-6 index which is defined as composition of tax-exempt U.S. municipal bonds that
have a remaining maturity of greater than or equal to 4 years and less than 6 years.
High Yield Municipal Bonds are represented by the BarCap HY Municipal Bond
index which is an unmanaged index made up of bonds that are non-investment
grade, unrated, or rated below with a remaining maturity of at least one year.
Global Equity is represented by the MSCI All World Country (ACWI) Index which is
defined as a free float-adjusted market capitalization weighted index that is designed
to measure the equity market performance of developed and emerging markets.
The MSCI ACWI Index consists of 44 country indices comprising 23 developed
indices including Australia, France, Germany, Japan, the UK and the US and 21
emerging market country indices which include Brazil, India, Mexico, Taiwan and
US Large Cap Core Equity is represented by the Russell 1000 index which is a
measure of the performance of the large-cap segment of the U.S. equity universe. It
is a subset of the Russell 3000 Index and includes approximately 1000 of the largest
securities based on a combination of their market cap and current index
membership. The Russell 1000 represents approximately 92% of the U.S. market.
US Small Cap Core Equity is represented by the Russell 2000 index which is a
measure of the performance of the small-cap segment of the U.S. equity universe.
The Russell 2000 is a subset of the Russell 3000® Index representing
approximately 10% of the total market capitalization of that index. It includes
approximately 2000 of the smallest securities based on a combination of their
market cap and current index membership.
US Real Estate Securities are represented by the FTSE NAREIT All Equity REITs
index which is defined as a comprehensive family of REIT performance indexes that
span the commercial real estate space across the US economy, offering exposure to
all investment and property sectors.
Non US Developed Markets Equity is represented by the MSCI EAFE index which is
defined as a free float-adjusted market capitalization index that is designed to
measure the equity market performance of developed markets, excluding the US &
Canada. The MSCI EAFE Index consists of the following 22 developed market
country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany,
Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
Emerging Markets Equity is represented by the MSCI EM index which is defined as
a free float-adjusted market capitalization index that is designed to measure equity
market performance of emerging markets - Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru,
Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Non-US Developed Markets Small Cap Equity is represented by the MSCI Small
Cap Index which includes over 6,000 securities across developed and emerging
markets and $4.4 trillion in free-float market capitalization. Over 4,00 securities are
outside of the US.
Master Limited Partnerships are represented by the Alerian MLP Index which is a
composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that
provides investors with an unbiased, comprehensive benchmark for this emerging
asset class.
Commodities are represented by the Bloomberg Commodity Index which is a
composition of futures contracts on physical commodities. It currently includes 22
commodity futures in five sectors. The weightings of the commodities are calculated
in accordance with rules that ensure that the relative proportion of each of the
underlying individual commodities reflects its global economic significance and
market liquidity.
Managed Futures are represented by the DJ Credit Suisse Managed Futures index
which is an asset-weighted hedge fund index derived from the TASS database of
more than 5000 funds. The strategy invests in listed financial and commodity futures
markets and currency markets around the world. The managers are usually referred
to as Commodity Trading Advisors, or CTA's. The Barclay Hedge BTOP 50 Index
also seeks to replicate the composition of the managed futures industry and is a top
-down approach in selecting constituents with regards to trading style and overall
market exposure.
and security types range broadly across equity, fixed income, derivative or other
security types. Fixed income strategies are typically quantitatively driven to measure
the existing relationship between instruments and, in some cases, identify attractive
positions in which the risk adjusted spread between these instruments represents an
attractive opportunity for the investment manager. RV position may be involved in
corporate transactions also, but as opposed to ED exposures, the investment thesis
is predicated on realization of a pricing discrepancy between related securities, as
opposed to the outcome of the corporate transaction.
Global Macro Strategies are represented by Investment Managers which trade a
broad range of strategies in which the investment process is predicated on
movements in underlying economic variables and the impact these have on equity,
fixed income, hard currency and commodity markets. Managers employ a variety of
techniques, both discretionary and systematic analysis, combinations of top down
and bottom up theses, quantitative and fundamental approaches and long and short
term holding periods. Although some strategies employ RV techniques, Macro
strategies are distinct from RV strategies in that the primary investment thesis is
predicated on predicted or future movements in the underlying instruments, rather
than realization of a valuation discrepancy between securities. In a similar way,
while both Macro and equity hedge managers may hold equity securities, the
overriding investment thesis is predicated on the impact movements in underlying
macroeconomic variables may have on security prices, as opposes to EH, in which
the fundamental characteristics on the company are the most significant are integral
to investment thesis.
Diversified Strategies are represented by the HFRI Fund of Funds Diversified Index
which is defined as strategy exhibiting - investment in a variety of strategies among
multiple managers; historical annual return and/or a standard deviation generally
similar to the HFRI Fund of Fund Composite index; demonstrates generally close
performance and returns distribution correlation to the HFRI Fund of Fund
Composite Index. A fund in the HFRI FOF Diversified Index tends to show minimal
loss in down markets while achieving superior returns in up markets.
Hedged Equity is represented by the HFRI FOF: Strategic index which is defined as
strategy seeking superior returns by primarily investing in funds that generally
engage in more opportunistic strategies such as Emerging Markets, Sector specific,
and Equity Hedge; exhibits a greater dispersion of returns and higher volatility
compared to the HFRI Fund of Funds Composite Index. A fund in the HFRI FOF
Strategic Index tends to outperform the HFRI Fund of Fund Composite Index in up
markets and underperform the index in down markets.
Private Equity is represented by the Cambridge Associates US Private Equity Index
which is based on end-to-end calculation of performance data compiled from U.S.
private equity funds (buyout, growth equity, private equity energy and mezzanine
funds), including fully liquidated partnerships, formed between 1986 and 2012.
represents approximately 92% of the U.S. market.
Private Real Estate is represented by the FTSE NAREIT All Equity REITs index
which is defined as a comprehensive family of REIT performance indexes that span
the commercial real estate space across the US economy, offering exposure to all
investment and property sectors, which is adjusted for a higher leverage factor
which would be expected in a private real estate investment.
Gold is represented by the S&P GSCI Gold Spot Index which tracks the spot price of
MSCI information may only be used for your internal use, may not be reproduced or
redisseminated in any form and may not be used as a basis for or a component of
any financial instruments or products or indices. None of the MSCI information is
intended to constitute investment advice or a recommendation to make (or refrain
from making) any kind of investment decision and may not be relied on as such.
Historical data and analysis should not be taken as an indication or guarantee of any
future performance analysis, forecast or prediction. The MSCI information is
provided on an “as is” basis and the user of this information assumes the entire risk
of any use made of this information. MSCI, each of its affiliates and each other
person involved in or related to compiling, computing or creating any MSCI
information (collectively, the “MSCI Parties”) expressly disclaims all warranties
(including, without limitation, any warranties of originality, accuracy, completeness,
timeliness, non-infringement, merchantability and fitness for a particular purpose)
with respect to this information. Without limiting any of the foregoing, in no event
shall any MSCI Party have any liability for any direct, indirect, special, incidental,
punitive, consequential (including, without limitation, lost profits) or any other
damages. MSCI All-Country World ex-US Index: is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets, ex-US equities.
It is not possible to invest directly in an index.
Relative Value Strategies are represented by Investment Managers who maintain
positions in which the investment thesis is predicated on realization of a valuation
discrepancy in the relationship between multiple securities. Managers employ a
variety of fundamental and quantitative techniques to establish investment theses,
Past performance is not indicative of future results. Please see Important Disclosures for additional information.
Page 15

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